How to buy an ETF: Frequently asked questions

04 February 2015 |
by Dominique Riedl

Buying an ETF is easy. All you need is an account with an online broker or fund platform. How you get started and what you should consider is answered by our frequently asked questions on buying an ETF.

Where do I buy Exchange Traded Funds?

Exchange Traded Funds (ETFs) are shares traded on the world's major stock markets. They are bought and sold just like any other shares. You can therefore buy them wherever you'd normally buy shares. For most people that means via a cost-effective online broker or fund platform. You can also buy ETFs through a traditional stockbroker or a wealth management service.

How do I buy an ETF?

You will need a pre-funded account with an online broker or fund platform. To buy a specific ETF you will need to know its name or stock market ticker symbol, as well as how much you want to buy in terms of units or total pounds invested. The entire buying process takes only minutes, but the specifics do vary with different firms, so please consult your chosen broker or platform's literature.

How much does it cost to buy an ETF?

The cost of buying an ETF varies with different brokers and platforms. It will usually be the standard trading fee for shares. Consult your provider. In the UK dealing fees of £6-£12 per trade are typical.

Do I pay a transaction tax when I buy an ETF?

No. On most UK share purchases there is a transaction fee called Stamp Duty charged at 0.5%. However stamp duty is not payable on overseas domiciled ETFs that trade in London. ETFs from the main providers are all domiciled in Ireland, Luxembourg and France. Stamp duty on UK-domiciled ETFs was abolished in April 2014.

How do I sell an ETF?

Via the dealing service where you bought and are holding the ETF. Consult your broker or platform's literature for specific details.

Can I buy an ETF direct from the ETF provider?

Unlike with mutual funds it is not possible to buy ETFs directly from the ETF provider (also known as the issuer). However because dealing fees are low this is a small price to pay for the flexibility and liquidity of ETFs.

Is there a bid/offer spread with ETFs?

Yes, ETFs cost slightly more when you buy them then you get for selling them (think of exchanging holiday currency at the airport as an analogy). This difference is called the 'spread', and it's typically around 0.2% to 0.5%. (Some illiquid ETFs may have higher spreads). This upfront cost does mean there are lower internal transaction costs, however, compared to traditional funds, since investors are paying their own way to buy and sell the ETF. In contrast, a traditional fund manager would need to sell holdings to raise money to repay an exiting investor.

Is there a liquid market in ETFs?

Yes, ETFs from the big issuers that track the main markets are highly liquid (easily traded). Some obscure overseas or sector-based ETFs maybe less liquid, however. That would be reflected in a greater spread. Check before buying.

Are there any additional charges I should know about?

Like other funds, ETFs charge an annual ongoing fee, which is deducted from the returns of ETF (rather than being an explicit separate fee that you pay). These annual fees can be as low as 0.1-0.5%. In addition your online broker or fund platform will charge a fee, too. Shop around for the best deal for you.

When can I buy my ETFs?

As ETFs are shares traded on the stock market, they are bought and sold during normal market hours. In the UK these hours run from 8am to 4.30pm.

When should I buy my ETFs?

You should align your trade with the opening hours of the home market of the ETF's underlying holdings. It provides better liquidity and spread. For example, trade ETFs which hold U.S. stocks in the afternoon and ETFs which hold Japanese stocks in the morning.

Can I buy via limit orders or out-of-hours orders?

Can I buy whatever ETF I want?

Most ETFs are freely traded. Some ETFs are deemed to be more complex investments, and therefore only suitable for more sophisticated investors or those who can confirm they've read the supporting literature.

Am I locked into my investment when I buy an ETF?

No, ETFs are continually traded like other shares so you can hold for as long as you like. There is no minimum holding period.

How do I know which ETF to buy?

Data providers such as justETF can help you research and select from the wide range of ETFs that are available. The stock market index or sector that is tracked should usually be clear from the name of the ETF, but that is just the first step in your research. The justETF screener is a great place to start!

Can I buy and hold my ETFs in an ISA?

Mainstream ETFs listed on the London market can be held in an ISA. ISA rules mean you can't transfer ETFs or other shares you own into an ISA, so you will need to buy them within an existing ISA. Holdings outside ISAs will need to be sold, and the money moved into an ISA (subject to the usual annual ISA subscription limit) where the ETFs can then be repurchased.

Can I buy and hold my ETFs in a SIPP?

Yes, in any SIPP that allows you to hold individual shares. Most people will buy their ETFs within their SIPP provider's platform. You can also transfer in existing holdings, albeit at a cost and there may be tax complications. Consult your provider or a financial advisor if you need to.